Funds that tap into the buy-to-let and residential property markets are allowing investors to get exposure without the responsibility that comes with owning bricks and mortar.
Property fund manager Cordea Savills recently launched another open-ended fund, the diversified residential opportunities fund, or diverse fund, in response to continued investor demand for residential-based collective vehicles.
The fund is registered in Jersey and is a qualifying investment for self-invested personal pensions and small administered pension schemes, although with a minimum investment of £10,000, the fund is aimed at those who are not too concerned by reports that buy to let has had its day.
Cordea Savills director of residential Patrick Carr says the residential market has historically outperformed the commercial market by a considerable margin and there is no reason to doubt that it will continue to do so for some time yet.
However, direct ownership in buy to let brings with it a number of management risks, such as regular voids, poor tenant covenants and fluctuating maintenance costs. This makes funds such as diverse an appropriate alternative, claims Carr.
“With uncertainty over future house price growth, the fund offers an alternative approach to investing in the residential market by targeting those sectors of the market which are not directly tied to movements in mainstream house prices and are able to offer stable levels of income as well as lease characteristics more commonly associated with commercial property,” he says.
The fund is very much aimed at maximising returns where the supply and demand of rentable residential property is at its most pressed.
Earlier this year, the fund bought 20 serviced apartments in London’s Notting Hill for £6.4m.
The apartments are within 500 metres of Portobello Road market and Whiteley’s shopping centre – a popular haunt for tourists.
The fund also owns a development of 27 apartments in central Portsmouth, which it bought for £4.6m last autumn.
Carr says: “Unusually for central London, the property benefits from planning permission both for residential use and nightly rental, enabling its use as long-let, short-let or apartment hotel. An initial five-year fixed return of 6 per cent per year is being guaranteed by the vendor, Galliard.”
However the fund, which is unregulated, is only suitable for investors who can afford to leave their money for a while.
Carr says: “The fund will use gearing to finance their property acquisitions and this may increase the volatility of returns. The underlying property of the fund may not be readily saleable and the value of real property is generally a matter of a valuer’s opinion.
“It may be difficult for an investor to deal in their investment as there may not be a liquid market for the shares and redemptions can only be made on certain dates.”
Although house price growth is forecast to be flattening out, Carr claims that residential property remains a sound investment within a collective scheme. “The fund also invests in other residential sectors, such as student halls, senior housing and residential land, which as asset classes behave slightly differently from mainstream housing,” he says.
Assetz is another company specialising in collective residential property investments. Business development director Charles Winstanley says the firm is just about to launch a second version of its commercial property fund.
Other funds include unit trust number one, which invests in property regeneration. Buying into a regeneration residential property investment allows the investor to make money in three ways, he claims.
“We buy the homes at a wholesale price, which puts us at an immediate profit. We then make money because the area is being regenerated and is benefiting from further investment. We are then able to benefit from house price rises in the surrounding area.
“This is as long as the property is a well-funded regeneration area,” he adds.
Assetz also has a second unit trust investing in straightforward residential developments while the third buys student accommodation.
Assetz also has a UK commercial income fund and is about to launch a second version. It invests in UK tenanted, off-plan and untenanted commercial property.
Winstanley says: “This fund will hold the property for the medium to long term and aims to deliver rental income to the investors in around 10 years by accelerated repayment of the initial lending on the property. Initial gearing will be used in the range of 50-85 per cent as applicable in order to maximise returns per pound invested and deliver income in the medium term.”
The fact that none of the unit trusts is UK-authorised is something which Assetz managing director Stuart Law argues is an asset in itself.
He claims it prevents Assetz being hit by investment restrictions, such as only being able to borrow an amount worth 10 per cent of the fund, having to have 20 per cent liquidity margin and only being able to invest a maximum of 80 per cent in property.
Law claims all the funds, with a minimum investment of £5,000 are idea for investors, even those in a low cost Sipp. “For example, an investor buys a £100,000 property funded by their Sipp. That is one asset in one geographical area.
“But for £30,000, say, they can buy into six different unit trusts that could be investing in over 3,000 properties and they could still have 70 per cent of liquid remaining, in stocks and shares.”
But some experts are urging advisers to sit tight.
One adviser, who did not want to be named, says: “We are still waiting to see how tax-favourable Reits will be. In the meantime, anyone looking at buying into these sorts of funds has to remember that big is better. For a fund to make sense it should not be smaller than £50m. Otherwise they will simply not benefit from the economies of scale needed when investing in such residential developments.”